Tuesday, April 07, 2009
With employment in the US at 8.5% and increasing by more than 600,000 a month, the new focus is on credit card debt. The typical American consumer uses their credit card as a cash flow management device. When they lose their jobs, credit cards are used to carry expenses over. The banks know this and analyze each transaction for signs you may be having trouble. Use your card to pay for utility or food at the grocery store, or take out a cash advance and your credit line may be cut short... on the spot. At the very least your interest rates will get jacked up to the "high risk" level.
Hidden fees, credit line cuts and dramatic increases in rates has unfairly targeted people whose credit is good and has meant big profits for the banks. Currently three regulatory bodies have announced changes to the rules that allow banks to trap cardholders, but these changes don't take effect until mid 2010. In a bid to resurrect a badly damaged image, Chairman of the Senate Banking Services Committee, Senator Christopher Dodd, is fast-tracking legislation that would see changes happen now. You may remember that it was Dodd, whose Connecticut seat is home to AIG headquarters, who took out bonus restrictions from the TARP I bill and touched off the recent furor over AIG's bonus bonanza, last month.
This legislation could touch off another "shit-storm" in the banking sector.
Speaking with Steve Forbes, Meredith Whitney believes that instead of a 'run on the banks', there is a high possibility of a 'run on the cards' by American consumers. The new legislation restricts card issuers from changing credit lines and interest rates on the fly, so when someone loses their job there are fears that person will max out their cards before the 24-day grace period featured in the bill. In anticipation of these changes, credit worthy holders are seeing their credit lines reduced ad-hoc.
Before any of the new regulations were introduced last year, credit line were chopped by $1 Trillion as banks reduced their exposure to credit card debt. A reduction in the $2.3 Trillion of existing credit lines in the US could do to the consumer what the banking crisis has done to the banking industry.
The average American owes more than $8,000 on their cards. With 1.5 billion credit cards in circulation in the US, half of the card holders pay the minimum each month.
Posted by Takwira at 4:38 AM